A Mixed Bag for Leap Wireless

Yesterday after market close, Leap Wireless International Inc. (LEAP - Analyst Report) declared mixed financial results for the fourth quarter of 2011. During 2011, the company restructured its business models through which it has given maximum emphasis to the high ARPU (average revenue per user) generating smartphone customers, while shedding less profitable wireless broadband subscribers as these users generally place huge load on its network.

However, the major concern for Leap Wireless is the intensely growing competition in the U.S. low-cost prepaid wireless phone market. Traditionally, the company competes with MetroPCS Communications Inc. (PCS - Analyst Report), Boost Mobile, the prepaid subsidiary of Sprint Nextel Corp. (S - Analyst Report), and Tracfone, the prepaid subsidiary of America Movil S.A.B. (AMX - Analyst Report). Recently, the two largest nationwide carriers, viz., Verizon Wireless and AT&T Inc. (T - Analyst Report) entered the wireless prepaid phone market after the growth rate of lucrative postpaid wireless market slowed. Verizon Wireless is a joint venture between Verizon Communications Inc. (VZ - Analyst Report) and Vodafone Group plc. (VOD - Analyst Report).

Quarterly total revenue was $767.4 million, up 14.6% year over year, but significantly below the Zacks Consensus Estimate of $804 million. Service revenue was $729.5 million, up 14.6% year over year. Equipment revenue was nearly $37.9 million, down 46.9% year over year.

Net loss, in the fourth quarter of 2011, was $84.4 million or a loss of $1.10 per share compared with a net loss of $249.4 million or $3.28 per share in the prior-year quarter. Quarterly EPS of a loss of $1.10 was however better than the Zacks Consensus Estimate of a loss of $1.13. Quarterly cash cost per user (primarily indicating carrier subsidy for new smartphone) was $22.46, up 3.2% year over year.

Quarterly gross margin was 40.1% compared with 41.7% in the prior-year quarter. In the fourth quarter of 2011, operating loss was $3.5 million compared with $27 million in the prior-year quarter. Quarterly adjusted OIBDA was $135.1 million, up 26.3% year over year. In the reported quarter, adjusted OIBDA was 19% of the service revenue compared with 17% in the year-ago quarter.

During 2011, Leap Wireless generated $387.5 million of cash from operations compared with $312.3 million in 2010. Free cash flow, in 2011, was a negative $54.2 million compared with a negative $86.6 million in 2010. At the end of 2011, Leap Wireless had over $751.1 million of cash & marketable securities compared with $419.2 million at the end of 2010. Total debt, at the end of 2011, was over $3,220.7 million compared with $2,840.6 million, at the end of 2010. At the end of 2011, debt-to-capitalization ratio was 0.84 compared with 0.76 at the end of 2010.

Subscriber Statistics

During the fourth quarter of 2011, Leap Wireless added around 178,889 net customers compared with 107,443 customers in the prior-year quarter. In the last quarter, the company gained a total of 209,000 wireless voice customers, but lost 30,000 wireless broadband subscribers. Total subscriber base, at the end of 2011, was 5,934,013, an improvement of 7.5% year over year. Quarterly consolidated churn rate was 3.9% compared with 4% in the year-ago quarter. Voice churn rate was 3.7% compared with 3.6% in the year-ago quarter. ARPU in the reported quarter was $42.09, up 10.4% year over year. Quarterly cost per gross addition was $238, up 13.9% year over year.  

Recommendation

We maintain our long-term Neutral recommendation on Leap Wireless. Currently, the company has a short-term Zacks #3 Rank (Hold).

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